Century Mortgage: Fed may raise rates by another 25 basis points in December; Hong Kong banks' odds of raising prime rate are 50/50

Century Mortgage: Fed may raise rates by another 25 basis points in December; Hong Kong banks' odds of raising prime rate are 50/50 The Federal Reserve kept the federal funds rate unchanged at 3.75% to 4%, as the market expected. In Hong Kong, both HSBC and BOC HONG KONG announced they would keep the prime rate (P) unchanged at 5%, and other banks are expected to follow suit. Wang Meifeng, Managing Director of Centaline Mortgage, noted that the Fed's pause in October after raising rates in September was in line with market expectations, and keeping rates unchanged at this meeting allows more time to observe lagging inflation and economic data. She said the U.S. has cited stronger economic growth momentum driven by investment expansion led by artificial intelligence companies, while inflation still faces sticky rebound pressure, meaning the possibility of a December rate hike has been retained. The market expects the Fed may raise rates by another 0.25% at its final meeting of the year in December to strengthen its efforts to control inflation. Wang noted that the policy statement mentioned the need to accumulate more information to determine appropriate policy, and emphasized that decisions depend on the latest data going forward. If the U.S. raises rates in December, it is not expected to raise again consecutively in January, in order to gain more time to observe the lagged effects and impact of rate adjustments. Interest rate management in the first quarter of next year will depend on inflation and economic data developments. It is expected that after the first quarter of next year, U.S. rates will roughly enter a sideways observation period first, with medium- to long-term rates falling after inflation stabilizes. She said Hong Kong dollar interbank rates gradually fell back in October to levels seen before the U.S. rate hike in September, putting HKD interbank rates more than 1% below U.S. rates, reflecting that banks' funding cost pressure remains moderate for now. Coupled with ideal bank deposit growth this year, the HKD loan-to-deposit ratio is at a 17-year low (the HKD loan-to-deposit ratio fell to 69.3% at the end of August). At present, the bank deposit base is large, giving higher resilience to interest rate adjustments. Wang expects the Fed may raise rates once more by 0.25% in December to address inflation risks, bringing the cumulative increase since September to half a percentage point. Whether Hong Kong banks follow with a prime rate hike at that time is expected to depend on factors such as the upward trend in HKD interbank rates and changes in banks' overall funding costs, with the probability of raising or not raising P at 50/50. Banks may raise the prime rate P due to higher funding costs, with the increase expected to range from 0.125% to 0.25%. However, given banks' strong resilience to interest rate changes in the past, and with a large bank deposit base and still moderate increases in funding costs, Hong Kong's prime rate may still have a chance to remain unchanged during the year. Wang believes that whether or not P is raised during the year may not be the key point. What is more noteworthy is that if rates do change, the magnitude is expected to be mild, and market H-based mortgage rates are expected to remain above 3% this year. On property prices, Wang noted that the U.S. restarted rate hikes in September to address inflation while Hong Kong banks kept rates unchanged, and the market is gradually digesting expectations that there may still be room for mild rate hikes during the year. Local rates are expected to change little overall, and interest rate factors currently have limited impact on the property market. Although property prices entered a consolidation phase in the second half after strong growth in the first half, causing buyers to become more conservative in chasing prices and more standoffs with owners that left secondary-market transactions stalled, primary-market projects priced close to market levels have kept sales ideal. Given improving property market fundamentals, high rents sustaining strong demand from the public to switch from renting to buying and to buy properties for rental income, and improving Hong Kong economic growth, these factors support the property market's continued positive development.